Wednesday, March 14, 2018

Trump Blocks a Merger

It's been a while since Donald Trump did something I approve of, so let's pause to celebrate this small victory. Bloomberg:

President Donald Trump's decision to quash an overseas bid for Qualcomm Inc. was almost certainly the right thing to do. . . .

Broadcom Ltd., based in Singapore, had made an unsolicited $117 billion offer to acquire Qualcomm, a leading U.S. chipmaker. Amid scrutiny of the bid by the Committee on Foreign Investment in the U.S. -- a panel that reviews such deals for security concerns -- Trump issued an executive order blocking it. It was only the fifth such deal ever held up by a U.S. president, and the largest by far.

Although Trump didn't explain his decision, the bid raised some obvious national-security concerns. Qualcomm is a major supplier for the Pentagon and holds numerous classified contracts. Its facilities are subject to a security clearance that could be jeopardized by foreign ownership. An acquisition of this kind was bound to raise red flags, whoever was doing the buying.

But that isn't actually why the merger was blocked:

Last week, CFIUS warned that Broadcom, an enthusiastic cost-cutter, might slash Qualcomm's R&D spending in pursuit of short-term profits. In doing so, it could put Qualcomm at a disadvantage in the race to offer next-generation wireless and diminish its influence in setting standards and protocols. That, in turn, could give a leg up to Qualcomm's top competitor, Huawei Technologies Co. Ltd., which has ties to the Chinese government and which U.S. intelligence agencies have deemed a security threat.

Various business journalists have confirmed that Broadcom is a big cost cutter and has done little in the way of research. This seems to me like a great reason to block a merger; if the US is going to stay wealthy, our firms have to stay on the cutting edge of technology.

But then I've never understood why we allow mergers in the first place. The essence of capitalism is competition; mergers reduce competition; therefore, mergers make capitalism less efficient. The only people who win from most mergers are the executives who arrange them and the Wall Street guys who finance them; consumers and workers almost always lose, and often ordinary stockholders do, too. As Adam Smith put it,

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.

Mergers are conspiracies against the public, plain and simple. Trump's administration has already blocked five, and the more they block – for whatever idiosyncratic Trumpish reason – the happier I will be.